Moody's Upgrades Meritor (MTOR) to 'B1'; Notes Key Position as Truck OEM Supplier
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Moody's Investors Service upgraded Meritor, Inc.'s (Meritor's)(NYSE: MTOR) debt ratings, including its Corporate Family Rating to B1 from B2, its senior secured rating to Ba1 from Ba2 and its senior unsecured rating to B2 from B3. Moody's also affirmed Meritor's Speculative Grade Liquidity Rating of SGL-2. The outlook is stable.
RATINGS RATIONALE
Meritor's upgrade reflects Moody's expectation that Meritor's fundamental strengths as a critical supplier to truck OEMS will enable the company to achieve the major components of its M2016 strategic plan. These include reducing operating costs, growing penetration with key customers and increasing adjusted EBITDA margins to 10% (compared with 8.3% for FYE September 2014 and 9.0% for FY 1Q ended December 2014). The company has already achieved its target net debt of under $1.5 billion. As a result of these operating initiatives and prudent financial policies, we expect the company's key credit metrics will continue to improve. Additionally, we expect the company to maintain a strong liquidity position. Critically, Meritor is now better positioned to contend with the cyclicality inherent in its industry than it had been in the past, and Moody's believes that the company will continue to strengthen its position as one of the foremost global suppliers of axles, drivelines and braking systems to original equipment manufacturers of commercial trucks and trailers.
Factors which could contribute to a higher rating include further progress by Meritor in implementation of its M2016 strategic plan including achieving its target of 10% adjusted EBITDA margins, maintaining net debt below $1.5 billion and growing organic revenue. Metrics on a Moody's adjusted basis that would have the potential to support an upgrade include EBITA margins above 8%, EBITA / interest exceeding 2.5x, and debt / EBITDA approaching 3.5x.
Future events that have the potential to result in a downgrade of ratings include sustained EBITA margins below 6.0%, EBITA / interest of less than 1.5x and debt / EBITDA above 5.5x. Other potential events that could result in a downgrade include meaningful loss of market position, a weakening of the company's liquidity profile, or more aggressive financial policies such as increased target leverage or return of capital to shareholders.
The principal methodology used in these ratings was Global Automotive Supplier Industry published in May 2013. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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